Bill in LegCo to tackle international tax avoidance and transparency in Hong Kong

But the length and complexity of the Bill could create uncertainty for smaller businesses.

Hong Kong, 8 Feb 2018 - The Hong Kong SAR Government gazetted a draft bill on 29 December 2017 intended to strengthen the territory’s laws concerning Base Erosion and Profit Shifting (BEPS). Coming after an extensive consultation period, the Inland Revenue (Amendment) (No.6) Bill 2017 is designed to meet the recommendations of the BEPS agenda laid out by the Organisation for Economic Co-operation and Development (OECD). The Government aims to have the Bill pass into law by the end of the current Legislative Council session in May. The next meeting to discuss the Bill’s committee is on 13 February.

“The main aim of this draft legislation is to ensure that Hong Kong has transfer pricing policies that are consistent with international standards on tax transparency and to prevent harmful tax practices,” says Cecilia Lee, Transfer Pricing Services Partner for PwC Hong Kong. “Multinationals operating in Hong Kong understand the importance of these long-anticipated changes. Without this Bill, Hong Kong could face censure, or even blacklisting, from the OECD and European Union. The challenge is to balance this with the Government’s aim of maintaining a simple and predictable low-tax regime.”

While the overall aim of the draft Bill was expected and understood, its length and complexity could prove challenging for small and medium sized enterprises – especially given that it covers domestic as well as international transactions. At 162 pages, it is one of the longest tax amendment Bills that Hong Kong has seen. It also goes beyond the BEPS minimum standards that have been adopted in many other jurisdictions. Its approach to establishing the correct “arm’s length” price (that one subsidiary of a company will pay to another, for example) will place a significant burden of proof on the taxpayer.

“While large, international companies are accustomed to observing the arm’s length principle, this Bill has the potential to apply what can be complex international tax concepts to smaller domestic businesses that may not be familiar with them and where there is significantly less risk of loss of tax revenue where both parties are Hong Kong tax payers” says Phillip Mak, China and HK Financial Services Transfer Pricing Leader.

In addition, the Bill encompasses provisions that appear to require individuals who are owner-managers of businesses to impute salaries tax on their personal dealings with their companies if these are deemed to differ from arm’s length arrangements. This may create uncertainty for private businesses, for example, in cases where owner-managers may work for below market wages until their businesses get off the ground,”says Peter Brewin, Transfer Pricing Director, PwC Hong Kong.

PwC believes the draft Bill serves a valuable function in codifying the international transfer pricing arrangements of multinationals, introducing country-by-country reporting and ensuring that Hong Kong’s concessionary tax regimes on corporate treasury centres, reinsurance, aircraft leasing and shipping meet international standards. However, the range of anti-avoidance measures and the broad scope of application could create

significant additional complexity for businesses domestically which is in our view not necessary to meeting the Bill’s stated objectives.

“It is understandable that the Inland Revenue Department should seek to introduce comprehensive legislation so that Hong Kong’s tax system is in line with international norms,” says Ms Lee. “But companies that are seeking to expand their operations in Hong Kong – particularly those that are dependent on R&D and intellectual property – will want reassurance that they will be able to operate in a flexible environment.”